美源伯根 (ABC) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AmeriSourceBergen 3rd quarter conference call.

Currently all phone lines are in a listen-only mode.

Later we will conduct a question-and-answer session, with instructions given at that time.

(Operator Instructions) As a reminder this conference is being recorded.

I'd now like to turn the conference over to our host, Mr.

Mike Kilpatric, please go ahead, sir.

Good morning, everybody, and welcome to AmeriSourceBergen's conference call, covering fiscal 2009 third quarter results.

I'm Mike Kilpatric, Vice President Corporate and Investor Relations, and joining me today are David Yost, AmeriSourceBergen President and CEO, and Mike DiCandilo, Executive Vice President and Chief Financial Officer of AmeriSourceBergen Corporation, and COO of AmeriSourceBergen Drug Corporation.

During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations.

We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations.

For a discussion of some key risk factors, we refer you to our SEC filings, including our 10K report for fiscal 2008.

Also, AmeriSourceBergen assumes no obligation to update the matters discussed in the conference call, and this call cannot be taped without the express permission of the Company.

As always, those connected by phone will have an opportunity to ask questions after our opening comments.

Here is Dave Yost, AmeriSourceBergen's President and CEO, to begin our remarks.

Good morning, and thank you for joining us.

ABC had a strong third fiscal quarter in a series of strong quarters, as we marched through a strong fiscal year in a series of strong years, reflecting the resiliency of our industry, and the resiliency of ABC.

During the June quarter, as a reflection our confidence in the future, we completed a two-for-one stock split, raised the dividend by 20%, and raised our annual earnings guidance, the only Company on the New York stock exchange to do all these things so far this year.

Revenues for the quarter were a record $18.4 billion, up 6%, net of the Chain Warehouse business that was discontinued July 1, 2008.

Gross and operating margins expanded, versus the same quarter last year.

We have increased our operating margin six or seven basis points in each of the last three fiscal years, and we have increased our operating margin year over year in all three quarters of this fiscal year.

Diluted earnings per share from continuing operations increased a robust 20% for the quarter $0.42 a share on a GAAP basis, and 16% year-to-date.

We did a great job managing our working capital and generated $328 million of of free cash so far this year, and we delivered these results in economic times that could be called turbulent by many standards.

Lots to like about the quarter.

Before I get into some Company specifics, I'd like to address some industry issues.

First, healthcare reform, like all of you, we are are closely watching the process of healthcare reform in our nation's capital.

I was there yesterday.

I think the atmosphere can best be described as dynamic, with things changing hourly if not faster, and lots of moving parts.

How healthcare reform will look and when is anyone's guess.

How much this reform is going to cost and the method of funding is changing frequently.

I think the key takeaway for our industry in ABC is this, anything that increases the number of prescriptions that are dispensed is good for the industry and ABC, and there's little doubt in my mind that increased pharmaceutical utilization will be a key element of any healthcare reform.

I think that additional emphasis on generics and biosimilars will also be good for AmerisourceBergen, given our mix of business.

The devil will be in the details of course, and like you, we will monitor the situation closely.

ABC and pharmaceutical distribution are clearly part of the solution of healthcare reform.

On the topic of industry growth, our assessment is that the total U.S.

Pharmaceutical Distribution market will grow in the 1% to 2% range for the year, in line with our original forecast, with the balance of the year at the higher end of the range.

It is important to note that ABC has delivered the strong financial metrics reported this quarter and fiscal year, in an industry growth environment which is low by historic standards.

Next regarding the competitive environment, I would continue to describe the industry as competitive but stable.

I'm about to celebrate my 35th year in the industry, and would characterize the current environment as normal or business as usual, with that perspective.

There are few multi-billion dollar pieces of business in the wholesale drug industry, and none have changed wholesalers in the last several quarters.

On the topic of brand manufacturer, fee-for-service, I would remind you that fee-for-service has mitigated much of the impact to wholesalers on price increases, though there are some manufacturers not currently on fee-for-service, or on a hybrid fee-for-service.

We are now negotiating the second or third generation fee-for-service contracts with many of our brand name manufacturer suppliers, and are happy with the results.

The value provided to the manufacturers by wholesalers under fee-for-service is clearly recognized.

We managed the manufacturer's inventory, of course, and assured next day delivery under the Prime Vendor concept.

We managed the credit function and supplied timely information back to the manufacturer, all very, very efficiently.

Now, turning to some specifics for AmeriSourceBergen, first, revenues.

Good news on the revenue front is that we have renewed our contract with Kaiser in a new seven-year relationship.

Kaiser is our second largest customer, with annual revenues in the $3.5 billion dollar range, representing about 5% of total revenues, and this long term renewal adds to the stability of our customer base.

Given the size and length this contract, and Kaiser's opportunity for growth, the pricing on this contract was very competitive, with some earnings growth impact over the next 12 months, but we're pleased to have extended our long-term relationship with this prestigious account.

On July 1, we anniversaried the Walgreen warehouse business discontinued last year.

You will recall, this was approximately $3 billion of annual revenue, impacting each of the first three fiscal '09 quarters by about 4%, and we are happy to have passed this milestone.

The Drug Company had strong revenue growth across all of its operating segments, with good penetration in independent pharmacy, regional chain, alternate site, and hospitals.

We continue to grow our Good Neighbor Pharmacy franchise-like program for independents and regional chains.

It's the largest in the industry, and we expect to have 3,700 or so stores participating in the program by our fiscal year end.

Generic revenues in the Drug Company were very strong, growing over 20% in the quarter, easily outpacing the generic market growth and reflecting new business and increased penetration in hospitals and alternate sites, as well as independents and regional chains.

Our AmerisourceBergen Specialty Group also continued to post strong revenues, up 6% to almost $4 billion for the quarter, in spite of [erythro-protein] stimulating agents, or ESA's, to physicians being down, compared to the same quarter last year.

The ESA volume with physicians has bottomed out in our opinion, as we expected.

Our Specialty Group continues to be extremely well positioned with the broadest offering of value added services in the industry by far.

Our Oncology business features the strongest physician interface in the industry.

Our Third Party Logistics and Reimbursement Consulting businesses continue to do extremely well.

We have a robust Plasma and Vaccine business, and expect the flu season to be very strong this year.

The depth and strength of our product and service offerings within Specialty Groups continues to deliver attractive margins.

Our Packaging Group trends are clearly improving, with the log jam of product approvals beginning to break.

I would remind you that we have the single largest packaging facility in the U.S., probably in the world, and do work for almost all the top pharmaceutical manufacturers.

So lots of positive momentum on the revenue front, in the right segments, with the right customers.

One of the strengths of ABC that may be overlooked on occasion, is the quality of our revenues, with only one customer representing more than 10% of revenues, and our strong position in Specialty and Generics, the part of the market that will experience above-market growth.

It's also worth noting that we have no large customer contracts up for renewal in the next year.

Our gross profits were up year over year, driven by Generics, our Specialty Group, and our customer mix, and coupled with good expense control, producing operating margin expansion again this quarter.

We expect to complete our fiscal year at ABC having spent fewer absolute dollars running our business than we did last year.

This strong performance by the associates of AmeriSourceBergen reflects our CE2 philosophy, customer efficiency and cost effectiveness, which is a part of the ABC culture at all level.

Expense control has long been a key focus of our management team.

You'll recall that operating margin expansion has also been a key focus of this management team for the last four years, with very positive results, as noted previously.

We have expanded our operating margin, at the same time, we have positioned our Company for the future with a sizable investment in a process we call business transformation, the foundation of which is a move to an SAP-based ERP system, positioning us to meet the future operating and IT demands of our customers.

In addition to controlling expenses, we continue to do an outstanding job controlling our work capital.

Our days sales outstanding were down this quarter versus last year, a good reflection of the strength of our customers and diligence by our field operating people, particularly in the current economic environment.

Our working capital management contributed to our cash generation noted previously.

So the operating cliff notes for ABC are great reading.

Good positioning and disciplined execution in a resilient industry, strong revenue momentum, with the right customers in growth segments of Generics and Specialty.

Operating margin expansion, expense control, strong receivable and inventory management, cash generation, with an experienced management team that has delivered compounded EPS growth from continuing operations of 15% since the creation of ABC eight years ago.

We have the organizational depth, cash, and balance sheet to handle mid-sized acquisitions within our core business should opportunities arise, and would consider something larger if it made sense, and we could respond quickly, if necessary, as I've noted on previous occasions.

As we look to the balance of our fiscal year, we are comfortable in our ability to deliver EPS at the higher end of our $1.59 to $1.65 per share of guidance range, a strong year of a series of strong years.

As in previous years, we will provide FY 2010 guidance when we report our full year FY 2009 results.

Our detailed bottoms-up planning process is currently in high gear.

Before I turn the floor over to Mike for some added color, I want to emphasize my optimism for the Wholesale Pharmaceutical Distribution Industry and ABC's position in that industry.

The fundamentals of this industry continue to be strong, as far out as any of us can see.

The demand for pharmaceuticals, and an efficient prime vendor network to distribute, them is rock solid.

The ABC circle of life continues to hold, the older people get, the more drugs they take, the more drugs they take, the older they get.

The growth engines for ABC, Generics, and Specialty continue to be the premiere space within the industry.

Our diversified and unconcentrated customer base continues to be a great strength.

We are a resilient Company in a resilient industry.

Here's Mike.

Thank you, Dave, and welcome to all of you who have joined us this morning.

It is certainly a pleasure to report an outstanding quarter in every respect.

And with our fiscal year 75% complete, we are very comfortable that we will finish our year at the higher end of of our guidance for the fiscal year, which, as a reminder, we raised last quarter.

In visiting several of our distribution centers this past quarter, I am continually inspired by our associate's commitment to operational excellence and superb customer service, and this commitment continues to show in our results.

In the quarter, we had good revenue momentum, margin expansion, and world class asset management, leading to solid cash generation, and 20% EPS growth.

While we have a somewhat tougher comparison in the September quarter, we expect to meet or exceed all of the financial targets we set at the beginning of the fiscal year.

Before turning to our results, just a reminder that all share and per share amounts have been restated to reflect the two-for-one stock split we affected during the quarter.

Now, starting with the income statement, revenues were a record $18.4 billion, up 2.2% from last year.

This is the last quarter that we will be effected by the loss of the Walgreen's Warehouse business, which anniversaried on July 1st, and net of this impact, sales would have been up 6% for the quarter.

Drug Company revenues were up 2% in the quarter, as our new and expanded relationships with the CPA Retail Group and the HPG Hospital Group accounted for $700 million of new revenue in the quarter, offsetting Walgreens' negative impact.

Our Specialty Group revenues were up 6%, once again fueled by broad-based growth from its four distribution entities and seven Consulting and other businesses.

We continue to be excited about our positioning in this fast-growing space, and the group performed well once again.

We continue to expect 5% to 7% revenue growth from the Specialty Group for the fiscal year.

Our Packaging Group, which is the smallest of our operating units, increased their operating income by 11% over last year's quarter, as several new projects kicked off in the third quarter.

We should continue this upward trend in the fourth quarter and forward, as our new project pipeline remains very robust.

Gross profit was up over 4% compared to the prior year quarter, as we benefited from improved product mix, with generic revenues growing in excess of 20%.

In addition, we had strong performance under our fee-for-service contracts with our branded supplier partners, and a nice contribution from price increases, including about $5 million we expected to get in our fourth fiscal quarter.

All of these positive factors combined to offset the normal competitive pressures on sell side margins.

Gross margins were up five basis points for the same reasons I just described, and you may remember that last year's third quarter gross profit was negatively impacted by an $8 million writedown of pharmacy dispensing equipment.

Our LIFO charge in the quarter was $4 million compared to $5 million last year, and for 9 months was nearly $21 million compared to $18 million last year.

As usual, we will true up our LIFO calculation next quarter at the end of September, and while we expect an annual charge of approximately $20 million, Our true ups in prior years have occasionally been significant.

Operating expenses in the quarter increased by $6 million dollars or 2% from the prior year, primarily due to a noncash intangible impairment of $8.9 million dollars, relating to our U.S.

Bioservices subsidiary, as well as increased litigation and bad debt expenses.

Bad debt expense in the quarter was $8 million, consistent with our first two quarters of fiscal 2009, but increased $4 million, compared to a very low bad debt expense quarter last June.

All of these factors more than offset the positive impact of a decline in facility consolidations and employee severance costs of $7.6 million from last year.

We continue to expect that operating expense dollars for the full year will be below fiscal 2008, despite continuing significant investments in our IT infrastructure through our ERP-enabled Business Transformation Program.

Operating income in the quarter of $213 million dollars was up a solid 8% compared to last year, and operating margins were up six basis points in the quarter, and are up six basis points for the nine months as well.

We continue to expect operating margin expansion in the low to mid single digit basis point range for the year.

As a reminder, we do have a very tough gross margin comparison in the fourth quarter, due to one-time benefits experienced in last year's fourth quarter.

Net interest expense of $15 million in the quarter was lower than expected and down 8% from the prior year, as we continued to be favorably impacted by low, short term market interest rates, primarily under our revolving credit facilities, where rates were down nearly 300 basis points from last June.

In addition our average invested cash during the quarter was up over $380 million compared to last year.

Our effective tax rate in the quarter of 36.8% was lower than last year's 37.6%, primarily reflecting net benefits from certain adjustments associated with filing our tax return during the June quarter.

We continue to expect and annualize an effective tax rate in the 38.4% range going-forward; however, we expect to be much closer to 38% for fiscal 2009.

Diluted EPS from continuing operations in the quarter was $0.42 per share up a robust 20% from last year's $0.35.

Our EPS growth from continuing operations of 20% exceeded our strong 8% operating income growth, as a result of the lower interest expense, the lower tax rate, and a 7% reduction in average outstanding diluted shares, primarily as a result our share repurchase program over the last 12 months.

We did have a net loss from discontinued operations in the quarter, pertaining to a working capital adjustment relating to the sale of PMSI and legal costs relating to our 2005 sale of Bridge Medical.

The significant loss from discontinued operations last year related to PMSI.

Now, let's turn to our cash flow and balance sheet, where we had stellar performance once again.

It was a busy quarter for our treasury staff as we renewed and amended our receivable securitization, renewed our Puerto Rico revolver, and announced a 20% dividend increase.

We generated $398 million of operating cash in the quarter, bringing our nine month cash generations from operations to $430 million.

We had capital expenditures of $34 million in the quarter, and $102 million for the nine months, and continued to expect to spend approximately $140 million for the year.

We also continued to expect our free cash flow, which we defined as operating cash flow, less capital expenditures, to be in the $460 million to $535 million dollar range for the fiscal year.

We are very pleased once again to see a drop in our average DSO in the quarter to 17.9 days, from 18.6 days last year.

In addition our past due receivables were down in both drug and specialty.

We are obviously very happy with this performance in light of the current economic environment, and it reflects the strength and quality of our diverse customer base, as well as our outstanding customer service and the diligence of our credit and receivable associates.

Our average inventory days on hand in the quarter were 24 days, down sequentially and flat with last year.

Average payable days in the quarter were up one day compared to last year, reflecting product mix shifts and some timing.

From a share repurchase perspective, we bought back $94 million in the quarter and $274 million for the nine months, in line with our repurchase assumption of $350 million for the full year.

We have $244 million dollars remaining on our current share repurchase program.

Our gross debt to total capital ratio at the end of June was 30%, in line with our 30% to 35% target range.

Our cash balance of $913 million is at its highest point in the last couple years, and provides us with significant financial flexibility so deploy capital.

Our first choice as always is to grow our business, and as Dave mentioned, we continue to have an active corporate development program, and as in the past, to the extent we do not identify acquisition opportunities and market conditions permit, we will continue to return capital to our shareholders.

At this point in time we have returned more dollars to shareholders, through our share repurchase program started in August 2004, than we ever raised from stock offerings.

In addition, we announced a 20% dividend increase during the quarter, on top of the 33% increase we announced in November.

Now turning to fiscal 2009 guidance, our EPS guidance from continuing operations, which we increased last quarter, remains at a range of $1.59 per diluted share to $1.65 per diluted share, which implies a fiscal fourth quarter diluted EPS range of $0.34 to $0.40 per share.

We are comfortable with the higher end of this range, but keep in mind that there are several factors that could impact the fourth quarter results, including our year-end LIFO true up, the availability of of flu vaccine, and whether Glaxo has a price increase, as we expect, during the fourth quarter.

As far as a comparison between our third quarter diluted EPS from continuing operations of $0.42 per share, and our fourth quarter range, the biggest difference is the timing of manufacturer price increases, which were more substantial in our third quarter than we expect in our fiscal fourth quarter.

Other differences include an expected increase in spending under our Business Transformation Program in the fourth quarter, as well as the new Kaiser deal taking effect in the fourth quarter.

The new Kaiser deal is expected to provide approximately a 3% headwind to operating earnings growth over the next 12 months, but will provide great stability over the next 7 years.

Additionally, we will have fewer outstanding shares in the fourth quarter than in the third, but that benefit should be offset by a higher tax rate in Q4.

Our EPS range continues to reflect full-year revenue growth of 1% to 3%, with the fourth quarter revenue growth rate exceeding this range, operating margin expansion in the low to mid single digit range, free cash flow of $460 million to $535 million dollars, and share repurchases of $350 million.

Finally, I would like to reiterate how pleased we are with our performance in the quarter, and for the nine months, which speaks to our resilience and excellent positioning in the marketplace to take advantage of the growth in Generic and Specialty Drugs.

The combination of our strong operating performance and our working capital management continues to expand our EPS growth well beyond our operating income growth.

All of our fiscal year targets are in reach, and we look forward to carrying our momentum into fiscal 2010, which we will address as always in next quarter's earnings release.

Now here's Mike Kilpatric.

Thank you, Mike.

We'll now open the call to questions.

I would ask you to limit your questions to one and possibly a follow-up, and then if there's time, you can ask additional questions.

Go ahead, Nick.

(Operator Instructions) Our first question comes from the line of Larry Marsh with Barclays Capital.

Thanks and good morning, everyone.

First of all, Dave, congratulations on 35 years in the industry.

I know it's been nothing but fun, and you're no worse for the ware.

Thanks.

You've [saw] an awful lot of that 35 years, that's for sure.

Yes, that's right, don't disclose that publicly.

I remember being with you a year ago, June, and it seemed to me you were at the time battening down the hatches on your costs, given what you were seeing in the market and the economy.

Obviously some of that was pretty pressing.

You communicated your views of the industry being resilient and such, just in terms of sort of where you're headed these days, given through the worst of the Anemia comps, and you're past the Walgreens and such, is your mind-set still as cautious as it was a year ago, or do you feel maybe a bit more positive?

We're feeling a little more positive Larry, than we were.

We've obviously picked up some new business since then.

Our sense is, as I mentioned in my prepared remarks, that the industry is growing a little faster in the latter half of the year than it did in the first half of the year, so we continue to be very optimistic about the industry.

Okay.

And then just a quick clarification, when you talk about the second and third generation fee-for-service agreements, it strikes me that some of these may have some more up side that allows you to participate with price increases.

Is that at all the case in what you're seeing, or are there any other data points on these next generation agreements that are different from stage one?

Larry, this is Mike.

There haven't been many changes in the fee-for-service agreements.

We continue to be very pleased, as Dave said in his prepared remarks as we renew our agreements.

Some of those do have some up side, when there are price increases, but I'd say that's fairly limited, although I think this quarter is a quarter where we did benefit from some of that up side.

And just - - I'm sorry.

Just add on, we started the fee-for-service, there was some concern in the industry, that as you got into the second and third generations, that it might become somewhat combative and so forth, and we've really found that not to be the case.

As we've gotten into fee-for-service, I think the value that we provide to the manufacturers has become more transparent for them, and it has improved our relationships.

And I say that, again, with 35 years of perspective, when early on there was somewhat of a combative relationship.

So we're very happy with how this whole fee-for-service has evolved, and it's one of the transformational impacts in the industry I would say.

Great.

And a final clarification.

You're calling I guess, a 3% headwind on operating profit growth with Kaiser.

You're obviously guiding to the fourth quarter, is that going to start in the fourth quarter, given it's a July 1st re-implementation, or is that all going to fall into fiscal 2010?

Is there anything unique to this contract, relative to the other big one you announced renewing a year and a half ago that would cause more of a disproportionate headwind?

No, it starts July 1st, Larry, and it's a long contract, seven years, which is long by industry standards, which tend to be three to five years.

And we're very happy with the relationship with Kaiser and with their growth prospects going-forward, so a prestigious account and we're happy to have it buttoned up.

Okay.

Very good.

Thank you very much.

Next call?

Next we go to the line of Tom Gallucci with Lazard Capital Management.

Your line is open.

Good morning.

Thanks.

First on Specialty you talked about maybe the EPO issues bottoming there, 5% to 7% growth this year.

How are you thinking about the longer term growth of that business, when you consider future new drug approvals and maybe that core base tightening up a bit?

We think Tom it's going to continue to grow faster than the market at large.

One of the issues we've got is that we have a very large market share in that space, so we're not going to be capturing a lot of additional market share as we go forward, so in some respects, our Specialty growth will reflect the market.

Again we think this is the largest growth area in the market, along with Generics, primarily because this is where some of the very expensive new therapies will enter the market.

So we're happy to be there, and I think we'll have above market growth within Specialty.

You think it reaches double-digits, or are we really looking more at a high single type business?

I think mid to high single digits is probably more reasonable going-forward, Tom.

Okay, great.

And you also eluded a couple different times, I think Dave in your comments, and then Mike again at the end in your comments about the flu.

Could you just put into perspective for us, how material that business is for ABC?

Yes, Tom usually we spend about, or sell roughly around $100 million a year in flu vaccine, so put in perspective, it's pretty small to ABC, but it does have good gross margins, and whether it falls in our 4Q or next year's 1Q can have a couple penny swing on those quarters.

Okay, great, and then just finally on the cash flow deployment, doing buy backs if you don't find acquisitions, can you just give us a little color on what that acquisition landscape looks like right now.

Thanks.

The acquisitions, Tom, we don't have anything big we're looking at at the moment, but we continue to be very nimble and ready to move.

Clearly our core business is where we have the most interest; add on, small add on business in the Specialty would be very attractive for us.

We just made a very small acquisition in Canada, now the very compelling offering in specialty in Canada.

Within the core distribution business, there's still some regional wholesalers out there that have great traction to us, and if they came up, we'd take a hard look at them.

Thank you, Tom.

Next question, please.

Our next question comes from the line of Ross Muken with Deutsche Bank.

Your line is open.

You talk about, as you sort of think about deploying the ERP, what that's allowing you to do from a management perspective on both the cost side and then just general strategy, and through this IT adoption, what have you learned about the business, or as you answer this, that kind of may have surprised you or that you weren't aware of before?

I'll take the strategy part, and we'll let Mike time in on the cost.

I would say the really big thing that the IT, and we really we call it business transformation; it's more than just IT, what it's really going to do for us is really well position us for the future demands of our customer needs and make us a lot more flexible and a lot easier to do business with.

I don't mean to imply we're flunking that now; we think we meet our customers' needs very, very well, as evidenced by our revenue growth, our new customer wins and the like.

But this is really positioning us for the next generation of of customer needs allowing our business to be very, very flexible, allowing us to put in some additional productivity improvements in our warehouse and the like, and really getting us really poised for the demands in the next three, five, seven years out.

Mike, you want to hit a little bit on the cost?

Yes, just as a reminder, we're still in the fairly early stages here of the implementation, fiscal 2009 is pretty much a development year.

Fiscal 2010 will continue that, with implementation really starting to occur at the end of fiscal 2010 and continuing through fiscal 2011.

So most of the cost savings and some of the benefits associated with the project will start probably 2011 and be most apparent in 2012.

I think the way we look at this internally, is it gives us a leverageable platform where we can continue to grow our business without growing our expenses in really the back office.

And as a parallel, I would compare it to what we did with our optimized program in our distribution centers, where we automated those facilities and now we're able to handle a lot more volume at a very low incremental cost.

So I think as we look at this long term, it becomes an engine for us that continues to allow us to have expense leverage and drive operating margin expansion in the future.

As far as total costs for the program, we said this year we'd spend about $100 million, with about a third of that being expense and two thirds being capital expenditures, and I think roughly we're right there.

The expense percentage may be a little bit higher, even though the total spend is right in line.

And just as the economy's firmed up a bit, in which pieces of the business have you seen the best snap back, is it independents, is it on some parts of the higher end of the Speciality channel?

Where is that delta as consumer confidence comes back been the most evident?

I will tell you, we've really seen it across all the segments, and it's one of the strengths our Company's participating in all of the segments, but I would not call out one.

We've seen nice comps in all of our customer segments, and we've picked up some new customers in all of the customer segments, so I think the general lift, if there is one to the extent we have one in the economy, I think it's going very, very broad based.

Great.

Thank you, David.

Our next question comes from the line of Randall Stanicky with Goldman Sachs, your line is open.

Hey, great.

Thanks for the question.

Just two quick clarifications, and then I actually have a question.

Is there an actual cash balance, in terms of cash, that would have you comfortable from a flexibility standpoint?

And then other one, on the Kaiser renew, is the 3% headwind due to renew economics, assuming there was no change to any services that are within that contract?

Randall,I'll take the cash question.

Certainly as I think I've said in the past, we're happy having a cash balance typically in the, say $300 million, $400 million dollar range to fund our day-to-day operation in the current environment.

We certainly felt like having more cash on hand than that was probably prudent, and we have carried more than that, but I think as the economic conditions get better, continue to get better, the credit markets are improving, certainly we have, I'd say, at least half of that cash balance available to deploy as we go forward.

And as I mentioned in my remarks, we want to grow our business and we'll keep our eye on acquisitions, and to the extent they're not there in the short term, and we won't hesitate to return some of that money to shareholders.

As far as the Kaiser contract, Randall, I want to be a little careful about getting too specific, too granular on individual contracts.

This is a large one, of course, for us, at $3.5 billion.

The thing I would say about that relationship, is this longstanding, it's a highly integrated account.

We do a lot of things that we think are unique for Kaiser, and we expect to expand that integration as we go forward and work very closely with Kaiser.

One of the things that makes Kaiser such an exciting account is the creative things that they're doing in terms of they're bringing services to their patients, and so we look to participate with them as they go forward.

So we are very, very excited about that relationship.

Let me ask a question on the Generics front.

This is a place you've done a good job obviously, up 20% again this quarter; I think it was in the teens last quarter.

Can you help us tease out, how much of that is greater traction versus some of the recent customer adds and things, from just some of that generic growth?

I think if you carve out the new customers we added this quarter, Randall, we'd be in the high teens this quarter, which I think is still above where we think the market growth is for generics.

I think the market growth has been in the high single digits; it's probably maybe the low double-digit this is quarter.

We continue to make strides, as Dave said, not just in our Retail business, where we have had great strength over the years, but also in the alternate site, or alternate share marketplace, where we continue to get traction, and where there's still more available and in the hospitals.

We talked about last quarter the fact that we start servicing the Novation GPO August 1st, as far as their oral solids on our Generic, our proprietary Pro-generic Solutions Program, so we've got a lot of momentum just in excess of just our normal historical customer base for generics.

That's great, thanks, guys.

Thank you.

Our next question will come from the line of Lisa Gill with JPMorgan, your line is open.

Thanks, it's Atif Rahim in for Lisa.

Sorry to beat up on this issue, but on the Kaiser contract, when you say there's a 3% headwind to operating earnings growth, could you clarify that?

Is it absolute operating earnings that you expect to be impacted by 3% negative next year, or is a different number that we should be looking at?

I think 3% over the next 12 months, Atif, which would reflect, including the three months of fiscal year '09 and the September quarter, so comparative year to year, would have about a 2% impact.

And certainly beyond that, it should be stable for the next six years.

Okay, and as you look to the fourth quarter, you're saying there's a $5 million benefit for the fee-for-service agreement.

Is there anything similar that you had in the year ago quarter?

Yes, it really wasn't from a fee-for-service agreement, it's just an expected price increase where we do not have a fee-for-service agreement with the manufacturer that we expected in Q4 that happened in Q3.

The big variable we do have in our fourth quarter continues to be Glaxo, and whether they will have a price increase; I think to size that, we have about a $0.02 expectation in our numbers.

Okay, got it.

And then finally, on the acquisition environment, with the cash balance that you have, any update on how that's looking, and whether any opportunities are eminent in this environment?

Well, what we would hope is as the industry reflects the higher multiples, that might enhance our ability to make acquisitions, in that very frequently people who have properties to sell try to establish their value based upon multiples in the industry.

So hopefully as the industry expands its multiple, as we expect it to do, we may have the opportunity to make some acquisitions as we move into our fiscal 2010 and we welcome that opportunity.

We've done a great job of integrating them, the last acquisition you'll recall we made was Bellco, and that's just turned out to be a home run for us.

So we've welcomed to have an opportunity like Bellco in the future.

Got it, thanks very much.

Thanks.

Your next question comes from the line of Charles Boorady with Citi, your line is open.

Thanks good, morning.

David you mentioned you were in D.C.

yesterday, I'm wondering, what is the most important thing to ABC?

Well, we are looking at several issues.

The number one issue that we're kind of working on at the moment is just keeping track of the overall healthcare issue, and making sure that our customers are properly represented.

There's an issue on prompt pay for oncologists, that's very, very important for us in how have the manufacturers calculate that in their costs, going back to the government.

But our biggest thrust is making sure that those who are making the decision in healthcare understand how important it is for our customer to be able to deliver localized pharmaceutical therapy, whether it's the independent drugstore, the regional chain, alternate site of the hospital, and it's just a very important, we feel for the legislators to hear that voice from a lot of different corners.

And we're down there, I'm down there myself, every six weeks or so, walking the halls, just making sure that the independent pharmacy in particular does not get overlooked in this debate, because we think they're a very, very important part of the healthcare system.

That's great.

Next question on expense reduction, can you quantify the opportunity there, or update us from your last Investor Day, where you laid that out?

And you mentioned low to mid basis points' improvement in your margins for the year, and I wasn't sure if that was all from operating expense reduction or some of that was related to mix?

Let me talk a little bit about operating expense control, because this is something our management team has focused on very, very successfully, over a long period of years, and as I mentioned in my prepared remarks, we expect to run AmeriSourceBergen with lower absolute dollars in fiscal '09 than we did in '08.

And '08 was very similar to '07, net of a couple of acquisitions we did, so we've done a really good job of holding the line on that.

As we look forward, we'd expect to have our costs under very close control; we are working a lot more lines with new business coming in now, we have our revenues at a run rate up 6% or so.

And we're going to incur some additional expenses with our Business Transformation Program as we move forward.

But absent those two things, I will tell you, we expect our expenses to be very, very close to what they were this year, and I will tell you, it's part of our culture, of just keeping our costs very, very tight.

I would just add to that, Charles, the margin expansion has come from gross margin expansion as well as from our operating expense performance, and that's particularly because of our product mix, our emphasis on Generics growing faster than the market, and our growth in Specialty which we have often said has a higher margin than we do in the pure drug distribution, because of all of the services they provide in addition to distribution.

So gross margin expansion and operating expense control have contributed to that operating margin expansion.

And just last question on M&A, in light of your strong free cash flow and you raised the dividend, and you still have plenty of capacity, so any thoughts on the landscape?

Are opportunities easier to come by, now that the financial buyers have been out of the picture for a while?

You know, I think we're optimistic that there might be some opportunities as we get into our fiscal 2010, or calendar 2010, a combination of two things, the first one, the financial buyers are somewhat on the sidelines, secondly, valuations may be perceived by people who are selling their company is going up, so we may have some opportunities, and we would welcome them.

Thank you.

You bet, thank you Charles.

Next we go to the line of Richard Close with Jefferies & Company, your line is open.

Yes, thank you.

The $700 million call out on the new customers added in the quarter, a couple new customers, could you just let us know whether they were fully ramped?

Did they contribute the entire quarter, third quarter?

I think that's most of the quarter, Richard, it may be a little more upside, maybe $750 or so, but we had a good representation in the quarter.

And just to keep everybody up to speed, it was a series of a lot of little customers, it was buying groups of new windows of customers kind of one at a time, so we've added several hundred customers, and as Mike said, most of that revenue is on board now.

And then with respect to the Kaiser, I know there's been a lot of questions, and you guys are sensitive to some extent, but the 3%, was that within your expectations?

Yes, I'd say a little bit steeper than the expectations, but a reflection of the prestige of the account, but certainly as we look to next year, we expect to achieve all the goals that we normally achieve despite the impact.

It had not been renewed for five years, so we came out about where we felt we would.

For a large account like that, very prestigious, with great growth projects and stuff, you would expect it to be competitive.

And then just a final follow-up on that, I think you mentioned the length of it a couple times, is this something we possibly see on a go forward basis, these agreements getting somewhat longer?

It would not surprise me.

And the reason I would say that is there's a lot of integration that goes on with very, very large accounts, and so when each side makes a long term commitment five, seven years, it makes it a lot easier to make the commitment for large scale change.

Seven years is a little unusual, bit three to five years is becoming very standard in the industry.

Okay, thank you.

Next we go to the line of A.J.

Rice, with Soleil Securities, your line is open.

Thanks, hello everybody.

Two quick things.

I know you're going to give the guidance on fiscal 2010 a little bit down the road, but I remember Pfizer is supposed to go to fee-for-service on January 1,is that still basically on track, [as with the] Wyeth deal or anything else impacting that?

And then, how do you expect that to change the outlook for 2010, what's your latest thinking on that?

That's still on track.

We expect that to occur January 1st, and one of the great advantages of a wholesale distribution company is you're not totally dependent on any one supplier, and any one supplier doesn't have a huge impact.

So that will be clearly be included in our guidance.

Pfizer continues to be very, very important supplier of ours, and we don't think it's going to have a material impact.

Impact should be fairly neutral year-to-year.

And then just real quick on the Generics, obviously that's been a great source of incremental revenue driver for you.

As you look ahead to the next year, I know one of your competitors at least has commented on the flow of things coming into Generics, you also did some contract signings here, which I think at least some of these you get incremental Generic buying there.

Can you just comment on the sustainability of the growth trend, or what you would think would be a good number looking over the next year?

Yeah, I think we expect a good Year from Generics next year.

Obviously, our revenue momentum will continue for the first half of next year, and the extra benefit we get from Generics should be there as well.

I mean, we're well positioned in the market, we think we should grow at least the high end of the Generic market growth.

So as we look at fiscal 2010, we don't see anything happening in fiscal 2010 that would cause any material comparative issues versus fiscal 2009, and certainly we've got some more work to do with our planning process, but there's nothing out there right now that we see that scares us.

Keep in mind our competitors have different fiscal years, so they're a little bit different as well.

The one great thing about Generics, I will tell you, as far out as we look, it looks to us to be the place to be.

Along with Specialty, and it's why we've concentrated so hard on having the customer [basically] participate in that.

But when you start looking at calendar 2011, and again, all of us have different fiscal years going, when you get out to calendar 2011, calendar 2012, the Generics are going to have a huge positive impact on this industry.

So we think the industry's in very good shape because wholesalers in general, AmeriSourceBergen in particular, have a great opportunity to provide value-added services both up and down the supply channel in Generics, so I tell you what, Generics and Specialty, good places to be, and that's why we focus so diligently on that in our customer mix.

Okay.

That's great.

Thanks a lot.

You bet.

Okay, we have time for one more question.

Thank you, our last question then will come from the line of David Toung with Argus Research, your line is open.

Yes, thank you for taking my call.

In prior quarters, there was quite a bit of discussion in the industry on slowdown in prescription volume pharmaceuticals, any insights you can provide on that?

And I also have a follow-up question.

We're not feeling that, you know, David.

I will tell you, I was with a retailer last night, who's got five stores, and he was reporting, it's all anecdotal of course, but he was reporting his business was strong.

I've interfaced with a couple dozen retailers in the last couple of weeks, and they're all reporting that their businesses continue to do quite well.

Right.

IHS numbers, a quarter ago, they were expecting 2009 to be their first year in a decline in prescription volume.

It's good to hear that you have anecdotal evidence.

Also, do you have a view of this activity in the PBM, some of the managed care are thinking of selling their units, do you see this having an impact on your businesses?

No, I don't think it's - - we're, I don't think, close enough to the whole PBM business Dave to comment on that.

Clearly we supply some of them, so it could be an opportunity if people we supply end up making the acquisitions.

Just to clarify, as far as we know, there's none of our customers that are in those sale discussions.

And we, as Dave said, have the chance to be a net gainer here.

Okay, great, well thank you very much.

Thank you.

And thank you, everybody for joining us.

I now would like to turn the call over to Dave Yost who will make some final comments.

If I had to conclude, I guess I'd conclude with my cliff notes of ABC that I mentioned earlier.

I think good positioning with disciplined execution in a resilient industry, strong revenue momentum with the right customers in growth segments of Generics and Speciality, operating margin expansion, expense control, strong receivable and inventory management, cash generation, experienced management team.

All that coming together producing a 15% EPS growth rate over the last eight years in the entire history of AmeriSourceBergen.

So we're very bullish in the industry and the place we have in it, and we look forward to sharing the results of our fiscal year in about 90 days or so.

Thank you, everybody, that will end the call.

Operator?

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